John Ivison: Canada Post poised to lay an egg next Easter after losing $58M this quarter

Summer has set in on the news business with its usual severity. The Pamela Wallin affair provided brief respite but late in the week, torpor had returned.

In search of some light relief, I read Canada Post’s latest quarterly, which provided a eureka moment for me, if not for the Crown corporation’s 68,000 employees, pensioners and customers.

“Based on current financial forecasts, the Canada Post segment believes it has sufficient liquidity to support its operations until at least the end of the first quarter of 2014,” says the section on liquidity and capital resources.

Say what? One of Canada’s largest employers, delivering 10 million pieces of mail, parcels and messages to more than 15 million addresses in urban, rural and remote locations across the country, could run out of cash by Easter?

Apparently so. The decline in the corporation’s core business has been well-documented. The group of companies that also includes Purolator, the parcels business, recorded an operating loss of $58-million in the first quarter of the year, primarily because of mail volume erosion.

Total volumes were down by 136 million and more pieces in the first three months of the year because people now pay bills online.

The Conference Board recently predicted that Canada Post will make an operating loss of $1-billion by 2020. But the prospects of self-sustainability are much, much more gloomy than just a gradual slide into operational obsolescence.

The corporation has a massive pension commitment that it simply cannot afford to service. The quarterly report says the pension plan’s obligations are $5.9-billion more than its resources. Canada Post has to make up the shortfall but has not been able to afford enough contributions to satisfy its obligations under the existing legislation.

Last year, the government offered some relief from those obligations that will enable Canada Post to defer payments of $2.4-billion by the end of 2013. But by then, the corporation will have reached the limit of its relief deal (which is calculated at 15% of the pension plan’s assets). This will put “significant pressure” on cash resources.

“The corporation is evaluating all options, including seeking regulatory relief and changes to the registered pension plan design to help address these challenges,” said the statement.

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Ian Lee, assistant professor at the Sprott School of Business at Carleton University, said the relief provided by government allowed reduced payments to the pension plan but the solvency deficit has not gone away — in fact, it’s grown.

Canada Post acknowledges it needs “to restructure its business model to meet the changing needs of Canadians and Canadian businesses.”

The Conference Board study offered a range of potential cost-cutting measures — wage restraint; alternate day delivery for mail; converting door-to-door to community mailboxes; eliminating delivery for urban residential customers; replacing corporate post offices with franchised outlets. Yet none of these options seem likely to generate enough savings to keep the corporation’s head above water. Even the Canadian Union of Postal Workers — the most militant union in the country — appeared to recognize the corporation’s miserable plight when it signed collective agreements that ushered in changes such as lower starting wages for employees, a wage freeze for 2015/16 and the adoption of a short-term disability program in place of traditional sick leave.

David Stewart-Patterson, vice-president of public policy at the Conference Board, said Canada Post is not alone in facing a pension crunch but its problem is more acute because of its operating performance.

What is the central mission of a postal service in the digital age?

“Setting aside the question of further relief, the payments required are going to be a significant drain on the reserves of an already tight situation for a declining business. It reinforces the urgency for the government as shareholder to define its priorities. What is the central mission of a postal service in the digital age?” he said.

Even if the government agrees to change the pension rules to give Canada Post more relief it would seem to be merely a case of postponing the inevitable.

None of the options will be popular. Professor Lee said the government can kick the can down the road by extending the period in which the solvency deficit has to be repaid or change the terms of the “pension promise” for future pensioners.

But at some point a more permanent resolution is required — either privatization, such as happened in Germany and the Netherlands, or major service reduction. “Radical surgery is required as the patient is dying before our eyes,” he said.

Erratum – I said in Wednesday’s column the Canadian army has 68,000 members. That should be 25,500. There are 68,000 full-time members of the Canadian Forces, which include the army, navy and air force. Apologies.